The terminal differentiation of myogenic cells initiates in the proximal portion of the limb bud whereas the distal region remains undifferentiated and proliferative. The apical ectodermal ridge maintains the progress zone in an undifferentiated state and induces proliferation of limb mesenchymal cells. Hox-7.1, a homeobox-containing gene, is expressed throughout the limb bud when limb outgrowth begins, whereas transcripts are later restricted to distal limb mesenchyme which is the proposed site of positional specification. Transplantation of proximal limb bud tissue into the distal portion of the limb results in a re-expression of Hox-7.1 in the transplanted mesenchyme. Similar grafts result in a positional reassignment to distal structures as well as de-differentiation of the grafted proximal tissue. Because of the association of Hox-7.1 expression with proliferative and undifferentiated cells, we tested whether Hox-7.1 regulates differentiation by transfection of Hox-7.1 complementary DNA into determined myogenic cells which represent one mesenchymal lineage in the limb. Here we report that forced expression of Hox-7.1 blocks terminal differentiation and results in a corresponding decrease in steady-state levels of MyoD1. Consistent with the association of Hox-7.1 with proliferation, Hox-7.1-expressing cells also acquire a transformed phenotype. Forced expression of Hox-8.1, a related Hox-gene, does not affect terminal differentiation indicating that the effects of Hox-7.1 are specific.